DEFLATION'S COMING, Says Gary Shilling, And It's Going To Clobber The Stock Market

The Business Insider ^ | 8-12-2010 | Henry Blodget

[blam]

DEFLATION'S COMING, Says Gary Shilling, And It's Going To Clobber The Stock Market

Henry Blodget
Aug. 12, 2010, 11:41 AM

All through the market rally and budding economic recovery of the past 18 months, most people concluded that the crisis was over and it was time to start worrying about inflation again. But strategist Gary Shilling of A. Gary Shilling & Co. stuck by his guns:

It was DEFLATION we needed to worry about, Gary said. And it was BONDS, not stocks, that investors should be buying.

Well, Gary's bearishness on the stock market caused him to miss a nice run, but he has been dead right about bonds. And he has also been right about the potential for deflation--as evidenced by the recent Consumer Price Index numbers and the fact that most other strategists have come to agree with him.

So what's Gary's current outlook?

Same as it ever was:

Prepare for chronic deflation, buy bonds, and sell stocks.

Why is Gary still expecting deflation? Because consumers still have way too much debt, and this debt will take decades to work off. Also, consumers are saving money again, which means they aren't spending it. Banks have plenty of cash and reserves, but the demand for money just isn't there. And when consumers are strapped and credit is contracting, prices tend to fall. (See Gary's charts here >)

Gary's biggest concern about his deflationary outlook, in fact, is that most strategists have come to agree with him (the crowd is often wrong). But, for now, is sticking with his call.

[snip]

[RobRoy]

>>...additionally, the fed must weaken the dollar to pay off our debt with cheaper dollars.<<

when the gov. owes money to its own citizens, that is a very easy thing to do. When it owes the money to other countries, that is a challenge and there is a risk: The risk of war.

Our gov is between a rock and a hard place on this thing. And our situation is not a US phenomenon. It is international.

[blam]

[nascarnation]

not sure if we can uses Japan as a predictor or not
here’s gold price in Yen

(scroll to bottom for longer time windows)

http://goldprice.org/gold-price-japan.html

[GilGil]

Could not disagree more. We are ehaded into a gtpeinflationary depression.

[GilGil]

Could not disagree more. We are ehaded into a hypeinflationary depression.

[blam]

Is Deflation Really Bad For The Economy?

[Texan Tory]

“OK, so how come everything I go to buy at the store, food, clothes, beer, etc, is so much more expensive?”

While gasoline is still pretty high, many food items where I live (Fort Worth, Texas) are now less expensive than they’ve been in a very long time. An Aldi store recently opened nearby, and a few days ago I bought eggs there for 49 cents a dozen and milk for $1.28 a gallon. Walmart and other stores have also dropped prices on staple items, although not as low as Aldi.

[Mr. Jeeves]

It couldn’t happen to a better group than the gamblers on Wall St.

Deflation won't hurt them much - they'll go short and make billions. It will hurt the 401K holder who doesn't have any option but "all long equities, all the time".

[MichaelP]

You can make a good case for deflation or inflation. I wish I had confidence either way. So I will stay diversified, Bonds, equities, both domestic and foreign. The stocks I have are are quality large cap though...

Mike

[M-cubed]

Gold will fall too.....that's when u buy it!...just before the inevitable hyperinflation...

now..having said that...the price will go down....but...the premium you pay over listed price will skyrocket!

[decimon]

...calls for deflation or inflation.

I confidently predict one or the other, commencing at some undetermined time and for some indeterminate period of time. Further, I predict both, eventually.

I'm not mocking you but wondering what value this advice is to the average shmo investor. Me, for instance.

[Toddsterpatriot]

What happens to gold in a dollar deflationary environment?

What happened to gold in the disinflationary early 80s?

[Texan Tory]

“Today, I can buy a 46 inch LCD Hi-Def TV for 1600 dollars. But next month, I should be able to get one for 1500 dollars. I think I’ll hold off purchasing one right now.”

This concept, while true, is not introducing any new deflationary pressure into the mixture. People are accustomed to the fact that electronic items are continually becoming cheaper (priced) and with better features. Eventually customers reach a point where they don’t want to wait any longer, so they go ahead and purchase the items they want. The idea that your house is becoming worth less and less every month, that is a new, very serious deflationary pressure.

[rickb308]

Well, your car is always worth less now than it was 2 years ago, unless it is a cherry ‘57 Chevy Bel Aire 2 Door.
House? Not sure. Real Estate market says so. County taxing authority doesn’t seem to agree. :-(

[TnGOP]

What happened to gold in the disinflationary early 80s?

If I remember correctly, gold was over $700/oz in '79, and came down dramatically in the early 80's.

[Ken H]

Heh! Reminds me of what a frustrated Harry Truman reportedly said, “Would somebody please get me a one-handed economist.”

[Toddsterpatriot]

Yeah, the price tanked, with lower, but still present, inflation.

If we get real deflation, the reaction might be stronger. Or maybe this time it's different?

[NeoCaveman]

What happens to gold in a dollar deflationary environment?

It seemed to do well in the 1930's.

[decimon]

Heh! Reminds me of what a frustrated Harry Truman reportedly said, “Would somebody please get me a one-handed economist.”

If Truman didn't say it then I'm glad someone did.

My comment wasn't to deride anything but to question the value of the advice. It's good as topic of discussion but of questionable value. If I took the advice to sell stocks and buy bonds then I'd likely be so far behind the curve as to be selling the stock low to buy the bond high.

[wendy1946]

I'd been hearing Larry Kudlow and one or two other supposed gurus on WMAL in DC claiming we were experiencing inflation around 1% while Ellen Brown has claimed we were heading into deflation and the news about the Fed over the last two or three days has basically answered the question as to who was right. Brown mentions "shadow lenders" i.e. Japanese, Chinese and others who were buying the toxic mortgage securities in bulk quantity and have now left the scene, probably permanently, and the fact that the Fed and government cannot take up that much slack, i.e. that about 40% of the wealth in the world as of three years ago has simply disappeared. The recent Fed move was a desperate attempt to put some of that head room back and, as Limbaugh notes on the air today, it didn't work.